Construction Contract Management
“Ref to the Syllabus”
Lec 3
Contracts on the basis of
Validity
Illegal Contract
A contract is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of law or is
fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to
public policy. These agreements are punishable by law
Valid Contract
An agreement enforceable by law when all the essential features of a valid contract are present
Void or Voidable Contract
A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid
and binding on the parties. It may subsequently become void.
An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of
other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right
on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and
enforceable unless it is repudiated by the aggrieved party.
Example
• A threatens to shoot B if he does not sell his bike to A. B agrees. This contract is voidable at the option of B
• “A contract which ceases to be enforceable by law becomes void.”
• The contract is voidable if a minor is involved as a one party at the option of minor
• Contract is voidable if one party breach the contract
• If elements of contract are not present, contract becomes void or voidable 2
• A contract is illegal if dealing with unlawful subject
Types of Contract On the Basis
of Performance
Bilateral Contracts: Unilateral Contracts:
• A bilateral contract is an agreement • A unilateral contract involves an action
between at least two people or groups undertaken by one person or group alone
• Offeror and Offeree exchange promises to • Offeror wants performance in exchange for
each other his promise
• A contract is formed when Offeree • Contract is formed when Offeree performs
promises to perform • Revocation of Offer: modern view is that
Example offer is irrevocable once the Offeree
substantially performs
• Purchase of items at your local store
Example
• Ordering a meal at a restaurant
• A reward of certain amount of money on a
• Receiving treatment from your doctor lost item
• Checking out a book at your library • insurances and lotteries
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Bilateral vs Unilateral contracts
• A bilateral contract is a promise for a promise; if the offeree need only
promise to perform, the contract is bilateral
• A unilateral contract is a promise for an act; if the offeree can accept
only by complete performance, the contract is unilateral
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Contracts on the basis of
Performance
Executed Contract
• A contract is said to be executed contract when both the parties to a contract have
performed their obligations
• Example
• When a bookseller sells a book on cash payment, it is an executed contract because
both the parties have done what they were supposed to do in a contract
Executory Contract
• When either both the parties to a contract have still to perform their share of obligation, then it is
executory contract.
• Example
• A buys a car from B for PKR 1.0 million. Now, A has made the payment but B has
not transferred the contract, it is an executory contract as the parties have to
meet the obligation
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Contracts on the basis of
formation
Express Contracts Implied Contracts:
• Contracts formed with the • When the offer and acceptance is
words spoken or written, is an made by acts or conducts of the
express contract parties, it is an implied contract
Example Example
• A coolie in uniform takes up the
• A tells B on phone that he wants luggage of B at railway station and
to buy his car for PKR 1.0 million B allows him to do so, then the law
and B accepts the offer on his implies that B will have to pay for
phone, this is an express the services of A. This is an implied
contract contract.
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Contracts on the basis of
formation
Formal Contract Informal Contracts
A formal contract is a contract An informal business contract is
where the parties have signed an agreement between two
under seal, while an informal parties that has the intent of a
contract is one not under seal. A formal contract without the seal
seal can be any impression made of a government agency or
upon the document by the parties witness. In other words, its a
to the contract. Usually the mutually agreed upon decision
contract is formed by a greater between two parties not formally
authority, such a government, or documented by an agency or
corporation witness
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Contracts on the basis of
formation
Tacit contract: Tacit contracts are implied contract in itself. e.g. Taking ticket in the
bus, during journey.
Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly
not contracts as there is no intention of parties to enter into a contract. It is legal
obligation which is imposed on a party who is required to perform it. A quasi
contract is based on the principle that a person shall not be allowed to enrich
himself at the expense of another.
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Contracts on the basis of formation
Quasi contract
Example: A is knocked down by a vehicle. B, a stranger, who found A on the road in unconscious
state, takes A to doctor. The doctor provides treatment to A, who is In a unconscious state. In such a
situation, there is no contract between A and doctor and A claims that he is not liable to pay for the
services offered by the doctor, as he was unconscious at the time of treatment and there is no
agreement between the two.
Application: In this case the doctor has spent his valuable time for the treatment of accident victim(A) and so, A
is liable to pay for the services of the doctor. If A fails to do so, the court can apply the doctrine of quasi contract
and order A to pay. This is to prevent the unjust enrichment of A at the expense of doctor.
Example: A holds land on lease granted by B, the zamindar. The revenue payable by B to the
Government being in arrear, his land is advertised for sale by the Government. Under the revenue
law, the result of such sale will be the annulment of A’ S lease. A wants to prevent the sale and his
own lease, pays the sum due from B. B is bound to make good to A the amount so paid.
Example: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is
bound to pay A for them.
Example: A and B jointly owe Rs. 100 to C. A alone pays the amount to C, and B, not knowing this
fact pays Rs. 100 again to C. C is bound to repay the amount to B.
Example: A railway company refuses to deliver up certain goods to the consignee, except upon the
payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the
goods. He is entitled to recover so much of the charges as was illegally excessive. 9
Oral and Written Contract
• Contracts do not have to be made in writing or be evidenced in
writing unless required by the law.
• It is most imprudent (unwise) to rely on oral contracts.
• The parties to a contract should make the terms of the contract in
writing.
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Significance of a Written
Contract
• A written contract usually supersedes all previous agreements.
• A complete understanding of all the contract conditions by both parties
is essential.
• Once a written, signed contract is finalized the law will attach full
significance to it.
• The law requires that the contract must be observed or the party
breaching the contract must pay any damages to other party.
• In case of Mistake in a written contract?
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Importance of a written contract
• Perhaps the most important reason for having such a contract is to try as far
as possible to ensure clarity and certainty in the parties’ respective rights and
obligations.
• In addition to the main responsibilities for design, fabrication and the like,
these will include such other obligations as provision of performance
guarantees and insurance against damage to the works and injury to persons.
• The contract should also provide for as many of the circumstances which
might arise during a project as possible. These will typically include
• Variations to the works; delay due to unforeseeable physical conditions on site; delay
due to adverse weather conditions; testing of the works; and termination of the
contract in the event of the default or insolvency of a party, including the financial and
other consequences of such a termination.
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Importance of a written contract
Procedures
• The construction contract should also provide the parties with
procedures to be followed in certain cases or to obtain a certain
result.
• For example, one important aspect of the procedural side of contracts
is that they set out rules for the notification and processing of claims.
• Thus clause 20.1 of the FIDIC contracts provides that a contractor must notify
a claim within 28 days of the time when he became aware or ought to have
become aware of the facts giving rise to the claim.9
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Importance of a written contract
Risk Allocation
• A properly written construction contract will allocate the risk
of loss or damage occurring to the project clearly and
completely, so that each party knows precisely which risks
he bears and what the consequences are should a risk
eventuate.
• For example
• design-related risks. Does the design for critical parts of the plant
or structure, for example, achieve the performance expected? Is it
efficient and workable?
• Other risks associated with site investigations : geotechnical
investigations, for example, where tunnelling or extensive
excavation work is required.
• Only if risk is clearly and completely allocated will each party
be able to manage risk efficiently, taking steps to protect 14
What should a properly written
construction contract cover?
• The terms of a construction contract should at least deal clearly with
the following areas:
• Identification of the parties to the contract: who (or what legal entity) exactly
is the contractor, and who (or what) the employer?
• How is the employer to ensure that what is provided complies with the
contract?
• Clear provision has to be made for inspection of the works, before they are
covered up and generally throughout the project;
• for the rectification of defects, both during the works and after they are taken
over.
• Crucially, provision needs to be made for suitable testing of the works, to ensure
that the performance and other requirements for the structure are satisfied; and
• A clear procedure and timetable for taking over and acceptance of the work by
the employer must be spelled out. 15
What should a properly written
construction contract cover?
• The terms of a construction contract should at least deal clearly with the
following areas:
• Whatever the contract, the time or times at which the contractor is expected to
complete must be defined.
• This will include the date of commencement of the works or services;
• the requirements for the programme (what it should show and how it is to be revised and
updated);
• provision for progress reports and monitoring of progress throughout the project;
• the contract completion date for the work or sections and the consequences of delay beyond that
date for which no extension of time is granted.
• Price and payment : the price and, more generally, the basis of payment of the
contractor (fixed price, remeasurement or other basis) must be defined.
• The amount and timing of payments (on achieving milestones in a payment schedule, for example,
or monthly or other periodic payments), and
• the procedures for applying for and obtaining payments (employer to pay on engineer’s
certificate, for example) have to be defined;
• also the remedies available to the contractor for delayed payment and his entitlement to advance
payments. 16
What should a properly written
construction contract cover?
• The terms of a construction contract should at least deal clearly with the
following areas:
• Responsibility for damage to the works and injury to persons needs
to be defined, including obligations to insure; as does intellectual
property rights and ownership of plant, equipment and materials
used or intended for the works.
• Environmental and social matters need to be covered, such as labour
protection and compliance with local anti-pollution regulations.
• The consequences of any failure to perform a party ’ s obligations
need to be spelled out. These include delay damages but cover other
defaults. The parties’ rights to suspend the works or terminate the
contract in the event of default by the other (and also the availability
of termination or suspension by the employer for ‘convenience’, or
otherwise than for contractor default) need to be specified.
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What should a properly written
construction contract cover?
• The terms of a construction contract should at least deal
clearly with the following areas:
• Security for performance of the parties’ obligations, including
retention and performance guarantees and bonds, needs to be
defined.
• The effect of ‘force majeure ’ or exceptional and overwhelming
events preventing performance for which neither party is
responsible should be defined. When can a party be excused
performance in such an event, for how long and with what effect?
• Governing law of the contract, the agreed language of the contract
and the notice provisions of the contract (whether all notices need
to be in writing, for example, or whether they can be given by e-
mail).
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What should a properly written
construction contract cover?
• The terms of a construction contract should at least deal
clearly with the following areas:
• Also important are procedures for one or the other party to
make a claim against the other, and how claims may be
determined when made. How are disputes to be resolved;
what steps, if any, need to be taken before a formal and
binding process, such as court or arbitration, is resorted to?
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Contract Management
Contract management is the process that enables parties to a contract to
meet their obligations in order to deliver the objectives required from the
contract.
It also involves building a good working relationship between the parties.
It continues throughout the life of a contract and involves managing
proactively to anticipate future needs as well as reacting to situations that
arise.
Contract Management
The central aim of contract management is to obtain the services as agreed in
the contract and achieve value for money.
This means
− optimizing the efficiency, effectiveness and economy of the service or
relationship described by the contract,
− balancing costs against risks and actively managing the relationship
between the parties.
Contract management also involve aiming for continuous improvement in
performance over the life of the contract.
